Weekly Bull/Bear Recap: September 26-30, 2011

Submitted by Rodrigo Serrano of Rational Capitalist Speculator

Weekly Bull/Bear Recap: September 26-30, 2011



+ Progress continues to be made on the Eurozone front.  Merkel is successful in rounding up her coalition and passing legislation to expand the EFSF’s firepower from 250 to 440 Billion Euros.  Despite fears of decreasing political will, we see that Eurozone officials are united in passing the proper reforms to eliminate this headwind.  Political Will remains solid as the Euro experiment is of extreme economic importance to Germany.  


+ Jobless Claims plunge by 37,000 down to 391,000.  The job market is better than many expect.  Looking at unadjusted claims, we can see a clear falling YoY trend.  There’s nothing to suggest that firings have increased and that the job market is deteriorating, in fact, past revisions show that it was stronger than expected.  


+ While the headline for Durable Goods Orders seemed weak, a look under the hood shows that the damage wasn’t as bad.  Business investment, a good measure of private spending, actually rose for the month.  ”Most of the decline was centered on autos and large defense products excluding aircraft, but those orders often swing sharply from one month to the next, and they are not viewed as good indicators of future trends.” 


+ Another example of the resilient manufacturing sector comes from the Chicago PMI index which showed strengthening in September.  This is important in that this reading is post the financial shock in August due to increasing Eurozone sovereign debt worries.  It clearly shows a manufacturing sector that is stronger than most think and is able to absorb these shocks.


+ Record-low mortgage rates are sparking a large refi wave.  Re-financing into lower rates will result in more discretionary income to support consumption.        




- The Eurozone situation isn’t getting better, it’s actually getting worse.  The suspense among politicians and the investment community just to pass an enhanced version of the EFSF (see bullish tidbit) doesn’t bode well when “reading between the lines”.  Political will is weaker than the bulls think.  The market already wants more in the form of a “leveraged EFSF”.  Germany, on the other hand, has staunchly opposed these measures, while its Constitutional Court warned that such action would result in a ceding of German sovereignty.  A new constitution, adopted by a national referendum, is required to pass additional legislation.  Meanwhile, Greece tension continues to rise and Germany wants harsher debt write-downs, chaos continues to reign supreme.  


- A crisis of confidence, caused by the Eurozone sovereign debt woes, is critically injuring the global recovery.  Copper fell roughly 3% and broke an important support.  Economic confidence in the Eurozone dropped to an almost two year low.  German retail sales plunge 2.9% in August, the largest one month drop in 4 years—while inflation unexpectedly rises —I’d hate to be the ECB right now.   


- Main Street indicators continue to flash red as the University of Michigan Consumer Sentiment survey records only a modest bounce (up to 59.4) in September from a near 3 year low of 55.7 in August, while the Bloomberg Consumer Comfort survey just posted its second lowest reading….ever.  


-  Incomes in the U.S economy dropped for the first time in 2 years.  The all-important “salaries and wages” metric, considered an essential measure for consumer spending, fell 0.2%.  Real consumer spending (spending adjusted for inflation) was flat and the savings rate falls to November 2009 levels, down to 4.5%.  The largest segment in the U.S economy has now stalled.  Recession is knocking at the door.  


- Obama is toast.  Republicans have him right where they want him.  Stimulus will not pass as deadlock will dominate.  The Fed’s the only game in town, and few believe that monetary stimulus will help move the needle on the economy.  There is no safety net for equity markets.